People strategy has long been a critical area of focus for organizations as it plays a vital role in shaping the operating model. The momentum of people strategy has been further fueled by factors such as the digitization of the workplace, the impact of the COVID-19 pandemic, the rise of diverse work arrangements such as gig and seasonal employment, global talent shortage, and the globalization of the labor market.
HR leaders have been proactive in navigating this landscape by introducing a range of initiatives from employee wellness programs to digital workspaces. These initiatives aim not only to keep the workforce engaged, productive, and resilient but also to build and maintain a workforce capable of delivering business results.
Workforce strategy is specific priorities and actions an organization takes with intent of ensuring workforce is capable of executing the business strategy. It helps organizations achieve business objectives by making sure that organization has right staffing level.
In this paper, we try to explore the relationship between business strategy and workforce strategy, presenting it in three parts. The first section highlights the potential benefits of strategic workforce management (SWM) for organizations. The second part outlines a systematic approach for linking business and workforce strategies. The final section is conclusion.
First thing first: What is SWM and why it is needed?
A positive correlation exists between a company’s staffing level and its growth. As functions work to reach their targets, their resource needs also increase, leading to a continually expanding organization.
To address this challenge, the industry has developed solutions such as zero-based organization and OKR cascading. Though both methods have promising impacts on workforce management, the former requires a significant redesign of organizational structure and substantial change management efforts, while the latter may only be effective for incremental headcount requests and can eventually fall short in justifying the entire workforce.
SWM focuses on understanding how the workforce contributes to business outcomes such as revenue, time-to-market, customer experience, brand image, and other desired outcomes, allowing organizations to plan their headcount needs based on these outcomes. In other words, it aims to allocate headcount optimally based on the strategic priorities of the organization.
Benefits of SWM
SWM resolves the alignment challenge between headcount planning and business strategy: In most cases, SWM is viewed and executed more like a financial process. The traditional methodology follows a sequence of business strategy, continued by the annual budget, and finally the headcount plan, with an iterative process between the annual budget and the headcount plan up until the latter is aligned with the budget. However, this methodology falls short as it fails to map the total headcount across functions or business units.
This is where SWM comes into play; it connects the headcount plan to business strategy by mapping the total headcount across various strategic initiatives. This allows business leaders to gauge the cost and return on their human capital investment.
SWM provides cost accountability for headcount needs. Every business line has both direct and indirect employees. Direct employees are responsible for production of goods and services and making available to customer, whereas indirect employees support product and service ecosystem. While it is relatively easy to set up an input-output model for direct employees, it gets more challenging and complex to determine the contribution of indirect employees to the overall result. This is primarily due to the fact that indirect employees are grouped based on specialist skills. This organizational structure requires the identification of indirect employees and the business line for which they work.
SWM allocates all direct and indirect labor across the business line, creating a sense of cost awareness and accountability for business leaders beyond their direct organization. This accountability ensures that business owners demand no more than the required quality from other departments and care about the staffing level of these departments owing to cost accountability, thus leading to an auto-control mechanism. In this way, it helps business lines to optimize their product/service portfolio by comparing the cost and return of their offerings.
SWM improves benchmarking. The payroll to total revenue ratio is one of the top performance indicators for HR leaders. This KPI can be misleading, especially for conglomerates and big corporations whose organization is heavily influenced by centralized support functions. This not only limits HR’s ability to find appropriate benchmarks at a similar scale and scope but also may yield inaccurate interpretations of the KPI due to varying levels of labor intensity across business lines. By mapping headcount to business lines, SWM facilitates the identification of the correct benchmark for the KPI.
Methodology for Linking Business and Workforce Strategies
- Define what is important for your organization.
SWM begins by clearly defining what is most important to the organization. This can be achieved by identifying performance metrics and business drivers, such as revenue, efficiency, output, time-to-market, customer experience, and more. The use of tools such as Balanced scorecard, OKRs, and KPIs can serve as useful assets in this process, providing a comprehensive view of the organization’s priorities and desired outcomes.
- Match business drivers to resource drivers.
In this stage, organizations try to link their workforce with their business drivers. a. Define the line of business: A business line is a set of products or services managed by a department or team. It can be a single product, a product portfolio, or a product category. The goal is to report leading indicators of each business line in a mutually exclusive and collectively exhaustive manner. b. Allocate the workforce across the business lines: Direct labor is easily assigned to specific business lines and is mostly found in commercial functions such as product managers, sales and pre-sales teams, product marketing, or sometimes in technical functions like technical product managers or operations. Indirect labor may work as internal account managers dedicated to specific organizational units such as finance and HR, or they may assume specific tasks such as change practitioners, account payable or corporate communication professionals. Both types of indirect labor require allocation using appropriate distribution keys. These distribution keys are not only used to assign headcount to specific business lines, but the right distribution key should also serve as a leading indicator of the performance of the respective business.
- Plan, implement, and monitor.
This step is a critical process that involves forecasting future workforce needs, injecting headcount into business lines, and monitoring results. Headcount projections are developed based on the company’s future objectives, taking into account historical data and empirical relationships. Successful implementation of SWM is not only limited to right-sizing headcount, but it also requires an understanding of job requirements, including job descriptions, skillsets, experience, and employment types such as project-based or seasonal. Implementation should also take turnover rates and retirement patterns into consideration to ensure efficient staffing. Nonetheless, SWM is not a one-time event but rather an ongoing endeavor that requires constant monitoring of results, aligning changing strategies to the workforce plan and revising and updating model inputs to adapt to any externalities happening in the labor market. By monitoring the results, businesses can identify areas of improvement and adjust their workforce plans accordingly to optimize efficiency and profitability.
- Build and maintain a centralized system.
The size of the organization can impact the source of data, which can be found in various systems such as CRM for sales metrics, a performance management system for company KPIs, an HR Information System for employee-related data, and so on. What is important is the ability to bring all relevant data on a specific business application and perform quantitative analysis.
Strategic workforce management aims to establish empirical relationship between activities and business outcomes and right sizing is very first step of modelling workforce needs of organizations. And this is vitally important for labor-intensive industries with a significant proportion of indirect labor, such as those with heavy support functions in procurement, finance, and HR that provide shared services across business lines. Furthermore externatilities such as job market dynamics and talent shortage should be taken into consideration while modelling current and future workforce needs.